If you’re starting up a new business, it can often be difficult to get approval for a traditional business loan. Many lenders will require you to provide cash flow evidence and other financial records and meet strict lending criteria. However, if you have a property that you can use as security, a caveat loan can provide you quick access to funding when you need it.
A caveat loan is different from a normal mortgage or home equity loan. Here’s a quick guide about caveat loans, including how they work and how they can benefit business borrowers.
What is a caveat loan?
A caveat loan is an ‘injunction,’ which means the loan is lodged on title behind your existing mortgage (no consent is required from your bank to do so). This also means the borrower is prevented by a ‘caveat’ from settling the sale of the property without the permission of the caveat loan provider. What makes a caveat loan different from the normal mortgage loans is that it usually requires no credit check because it’s secured against a property.
A caveat loan usually has a short turnaround time, with an application typically approved within a day or two. With such a quick settlement, the loan is released immediately. A caveat loan repayment term is also structured within a short period, typically within one to 12 months.
How does it work?
Once a lender approves your application, they lodge a caveat on the title deed of your property, giving security to the loan. A caveat indicates that the lender has a registered financial interest in the property.
When a caveat loan is active, the caveat informs other lenders that the property has been used for security. Therefore, it can’t be used for any other dealings until the loan is settled. With this restriction, no other loans compete for priority stake over the property, making a caveat loan easy to process.
Additionally, with a caveat, a borrower can’t sell the property without the consent of the caveat loan provider. Upon settlement of the loan, the caveat is removed from the property.
Can you get a caveat loan for a new business?
Yes, you can get a caveat loan for a new business as long as you have a property you can use as security. That’s one of the best features of this type of loan – if you’re a property owner and your property has solid equity, you may be eligible for a caveat loan. In addition, self-employed borrowers and borrowers with bad credit can apply for a caveat loan. A caveat loan for business use can also be used by start-ups, established business owners, and commercial property investors so trust on Credit One.
When assessing if a caveat loan is right for your business, it’s wise to discuss these areas with your mortgage broker and accountant:
- Whether you have a property and sufficient equity to use as security against the loan
- If your business needs an immediate source of funding
- Whether you can repay the loan on time
- What your ‘exit plan’ is (i.e. what you need to achieve to pay off the loan)
How much does a caveat loan cost?
The cost of a caveat loan is largely determined by the loan amount, term and interest rates. A caveat loan term is short, usually up to one year, and interest is usually charged every month. The interest rates vary from lender to lender. In addition, some lenders charge fees, including application fees, valuation fees and legal fees – so be sure to get a thorough understanding of all fees, to include whether they’re one-off fees or ongoing.
What are the benefits of taking out a caveat loan for your business?
- A caveat loan provides quick access to finance
- The loan amount is flexible
- There’s typically minimal or no documentation required
Where can you use a caveat loan?
A business caveat loan can be used for any business purpose. Common uses for a business caveat loan include funding operating expenses, such as general working capital, payment of unexpected bills, or employee salaries. It can also be used when hiring new staff, purchasing bulk stock or additional inventory.
A caveat loan provides business owners quick access to the funding and can be used for a variety of purposes to support business challenges or help facilitate growth.